5 things to do before investing surplus money in equity mutual funds

Mutual fund managers and advisors may be advocating caution, but several investors, especially the new ones, are feeling extremely brave these days. Most of them have a very aggressive risk appetite, according to them. They are ready to invest for a very long period. All they need is just the right kind of mutual funds to make money from the current market conditions, they say.

Sure, you are entitled to your optimism. Here are some safety nets you can use to land safely if things don’t move the way you imagined.

Take stock of your situation

Yes, you have Rs 50,000 with your, probably in your bank deposit. And it is a great idea to invest the money in equity mutual funds, especially since the market has corrected around 30% in the last one month. Just hold on for a second and take a close look at your situation. Are you sure you won’t need the money in the next seven to 10 years? Let us make it tough for you – even under extraordinary circumstances? Yes, we are passing through an extremely tough situation where job losses, health scare, salary cuts are a reality. If you face any of these events, you will not need this money? If yes, go ahead. Otherwise, move on to the next point.

Are you adequately covered?
You can take care of certain unforeseen events like health scare by securing an adequate health insurance cover for you and family. Check whether you and your family members have a large enough cover to take care of the hospitalisation expenses in case of a health emergency. Do not count on Rs 1-3 lakh cover. Most financial planners ask their clients to have a health cover of at least a cover of Rs 10 lakh. They ask their well-off clients to get a cover of Rs 25 lakh.

Look at your emergency fund
Keep an emergency fund of at least three to six months is the standard advice given by most financial advisors. However, this would fall short in the current situation. You should have an emergency fund to take care of your living expenses for at least six months to a year to tackle the current uncertain situation. Financial planners say this is extremely crucial for people with elderly parents or young children who are financially dependent on them.

Do not count on immediate revival
The market has fallen even sharper earlier, but it has always gone back in record time is one statement every rooky investor loves to quote these days. Sure, Indian markets have seen sharper fall and it has also recovered fast, but don’t count on it. Every situation is different, and history need not repeat itself all the time. Remember, there are always exceptions. Sure, if the market bounces back in no time, we all are happy – it is good for the economy and the country. But what if it doesn't? That is the point we are trying to make. Be prepared for that eventuality.

Not feeling adventurous anymore?
Okay, that stocktaking has disheartened you? You don’t think you have the money to bet on the current market to make quick bucks? Do not feel dejected. As said earlier, the market has seen sharper fall before. That means, it may see sharper fall in future, too. If you are young, you would see many corrections in the market during your investment journey. That means, you will have opportunities to make money in the coming years. Now, it is extremely important to stay safe and keep the wellbeing of your dependents in mind. If you stick to your budget, financial plan, and investments, you will succeed in creating wealth to take care of all your goals.